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Are There Too Many Entrepeneurs? A Model of Client-Based Entrepreneurship

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Author Info
James Rauch (UC San Diego)
Joel Watson (UC San Diego)

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Abstract

Client relationships create value, which employees may try to wrest from their employers by setting up their own firms. Firms counter by inducing workers to sign contracts that prohibit them from competing or soliciting former clients in the event of termination of employment. Society trades off higher effort by self employed workers against the cost of establishing redundant businesses, and local governments compete to attract clients. If clients, firms, and workers can renegotiate restrictive employment contracts and make compensating transfers, the socially optimal level of entrepreneurship will be achieved regardless of government policies regarding enforcement of these contracts. If workers cannot finance transfers to firms, however, firms and workers will sign contracts that are too restrictive and produce too little entrepreneurship, and governments can increase welfare by limiting enforcement of these contracts. With or without liquidity constraints, more entrepreneurial locations will attract more clients and have higher employment and output.

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Paper provided by Berkeley Olin Program in Law & Economics in its series Berkeley Olin Program in Law & Economics, Working Paper Series with number 1086.

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Date of creation: 01 Apr 2003
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Handle: RePEc:cdl:oplwec:1086

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References listed on IDEAS
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  1. James E. Rauch & Joel Watson, 2002. "Entrepreneurship in International Trade," NBER Working Papers 8708, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Yeon-Koo Che & Donald B. Hausch, 1999. "Cooperative Investments and the Value of Contracting," American Economic Review, American Economic Association, vol. 89(1), pages 125-147, March. [Downloadable!] (restricted)
  3. Simeon Djankov & Rafael La Porta & Florencio Lopez-De-Silanes & Andrei Shleifer, 2002. "The Regulation Of Entry," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 1-37, February. [Downloadable!] (restricted)
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  4. Robert E. Lucas Jr., 1978. "On the Size Distribution of Business Firms," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 508-523, Autumn. [Downloadable!] (restricted)
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This page was last updated on 2009-11-13.

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